Cisco: Another Downgrade, This Time From Merrill

By Eric Savitz

Cisco Systems (CSCO) shares were hit by their third downgrade in two days, as Merill Lynch’s Tal Liani dropped his rating to Neutral from Buy, noting that the stock is within 8% of his $30 price target. Liani cited five reasons for the downgrade:

Street expectations are high.

Strength is company specific and not industry wide, meaning growth could moderate as the impact of a few factors subsides.

Year-over-year earnings comparisons could turn more challenging in the second half.

Peak operating margins imply limited upside to estimates.

Premium valuation to the “mega cap” tech peer group.

Liani says the recent strength in the company’s results reflects product cycles, smart M&A, sales force increases and easy comparisons to a weak first half 2006. But he says trends could moderate in the second half as “the impact of some of Cisco’s smart moves begin to fade” and comparisons get tougher.

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Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.